Fixed exchange rate policies reinforce fiscal policy effects.

Question

Quizplus · Accepted Answer

Fixed exchange rates mean that the value of a currency is pegged to another currency or a commodity, which limits the fluctuation of the exchange rate. This reduces uncertainty for traders and investors, and also makes it easier for governments to implement fiscal policies because they can count on a stable exchange rate. If a government increases government spending or cuts taxes to stimulate the economy, a fixed exchange rate ensures that the value of its currency will not fluctuate too much, which reinforces the effects of the fiscal policy.

Fixed Exchange Rate Policies Reinforce Fiscal Policy Effects